Title: The impact of news on firm-specific risk-neutral higher moments
Authors: Mohammad Jahan-Parvar - Federal Reserve Baord of Governors (United States) [presenting]
Sirio Aramonte - Federal Reserve Board (United States)
Abstract: A methodology is proposed to study the impact of arrival of news on risk-neutral higher moments of a firm's expected stock returns, by blending option prices and CDS spreads - with the former providing information about the central part of the distribution and the latter determining the left tail. We apply the methodology to a large sample of risky U.S. and European firms. We assess the economic impact of arrival of macroeconomic, corporate, and political news and their propagation through the second and third risk-neutral (option implied) moments. Our methodology is closely related to a recent work which combines CDS and options data to extract firm-specific risk-neutral distributions. It documents the economic value by carrying out time-series and cross-sectional asset pricing tests. Our study differs from that work in that a) our focus is on transmission of news rather than gauging the economic value of blending options and CDS data and b) we use international data in addition to U.S. data.